The MSCI Asia Pacific Index advanced 0.5 percent today
after European officials reached an agreement on aid for Greece.
Malaysia’s KLCI index has fallen every day except two since
closing at a record on Nov. 1, losing 4.5 percent in that time,
while the MSCI Asia Pacific has gained 1.7 percent. Trading
volumes on the KLCI are about 9.2 percent above the 100-day
average, data compiled by Bloomberg show.

“The Malaysian market’s defensive attribute is probably
less appealing now,” David Ng, who oversees 18 billion ringgit
($5.9 billion) as chief investment officer of Hwang Investment
Management Bhd., said by phone in Kuala Lumpur. “Global
indicators seem to suggest that the global economy is improving.
Malaysia is traditionally defensive. There is probably some
rotation out of Malaysia by funds.”

The average yield of stocks in the FTSE Bursa Malaysia KLCI
Index was 3.6 percent, compared with 2.9 percent in the MSCI
Asia Pacific Index, according to data compiled by Bloomberg.

Widest Gap

The Malaysian gauge trades at 14 times reported profit, a
12 percent discount versus the MSCI Asia Pacific Index, which is
the widest gap since June 2010, according to data compiled by
Bloomberg. The discount was 5.4 percent when the KLCI Index
closed at an all-time high on Nov. 1.

At its Nov. 1 record, valuations were at a 15-month high of
15.4 times. The index jumped 2.2 percent in October, the biggest
monthly gain since February, compared with the MSCI Asia Pacific
Index (MXAP)’s 0.3 percent drop.

Until market slump this month, Malaysian stocks had
withstood the worldwide selloff this year as Europe’s debt
crisis and concerns over global economic growth drove investors
to less risky assets. Kuala Lumpur has been home to three of
Asia’s four biggest initial public offerings this year including
palm oil producer Felda Global Ventures Holdings Bhd., which
raised $3.3 billion.

Boosting Consumption

Malaysia’s government has bolstered spending on
infrastructure and stepped up efforts to spur domestic
consumption ahead of national elections that must be held by
early 2013. Gross domestic product growth may expand by as much
as 5.5 percent next year from an estimated 5 percent in 2012,
Malaysia’s finance ministry forecast in a report in September.

Najib Razak, who took over as prime minister in 2009,
unveiled a program in 2010 that pledged $444 billion of private
sector-led investments. He cut personal income tax, raised civil
servants’ minimum pensions and repeated cash handouts to low-
income households in his budget speech in September, after
increasing civil servants’ salaries in the past year to boost
domestic consumption.

Heightening risks from Malaysia’s general election may have
caused investors to sell stocks to lock in profits they made
earlier this year, Choo Swee Kee, who oversees the equivalent of
about $230 million as chief investment officer at TA Investment
Management Bhd., said by phone in Kuala Lumpur.

Taking Profit

“With most fund managers sitting on pretty decent gains
and the possibility of elections coming in a short two, three
months later, it may trigger profit-taking activities,” Choo
said. “It’s getting very close to that so maybe people feel
it’s about time to turn a bit cautious.”

The current parliament will end its five-year term on April
28, 2013.

The Malaysian gauge has tumbled 4.5 percent this month,
compared with the 1.4 percent gain in the MSCI Asia Pacific
Index, and 0.4 percent increase in the MSCI Emerging Markets
Index (MXEF) in the same period.

“We think it’s nothing to do with fundamentals and mainly
it’s about technical and people are realizing profits,” Tan Lip Kwang, who helps manage the equivalent of $1 billion at K&N
Kenanga Holdings Bhd., said by phone. “They might re-position
next month.”